Cracks Appear In New Oil Deal Between Baghdad and The Kurdistan Regional Government

In September 2012, the Kurdistan Regional Government (KRG) and Baghdad came to their third agreement over the former exporting its oil. The previous two times, the deals broke down over disputes over paying the energy companies operating in northern Iraq. The problem stems from the fact that the central government wants control over oil policy and contracts, which comes into conflict with the KRG’s wish to have their own strategy. That unresolved issue is coming to the fore again as the Kurds dramatically cut their exports at the end of November. This could eventually lead to the breakdown of the latest agreement between the two sides.

In November, the Kurdish regional government decided to reduce its oil exports. According to the state-run North Oil Company, the KRG was only pumping 70,000-80,000 barrels a day by the end of the month through the northern pipeline to Turkey. Before that, Oil Minister Abdul Karim Luaibi told the press on October 4 that the Kurds had reached 170,000 barrels a day. For the month, the region averaged 146,000. That was below its 200,000 barrel a day quota that it was supposed to reach that month. Deputy Premier Hussein Shahristani, who is in charge of Baghdad’s energy policy, said that payments to the oil companies working in northern Iraq would be stopped, because the KRG was not meeting its mark. The recent drop in exports then, was likely due to fears that Baghdad will follow through with Shahristani’s threats. At the same time, it appears that the KRG lacks the capacity currently to maintain its export levels, and meet its quota. Officials such as Shahristani, who has been at the forefront of opposition to the Kurds’ independent energy policy, have used this fact against them. Kurdistan may be stuck in a Catch 22 in this situation as a result. It could continue to pump oil at its current rate, but it would know that would be below its mark. Baghdad would constantly hang that over its head, and use it as an excuse not to make any payments.

This series of short-term deals is frustrating for the companies operating in the KRG. Genel Enerji and DNO for example, which operate the Taq Taq and Tawke fields threatened to stop foreign sales through the northern pipeline in early October, because they had not been paid yet. Together, the two firms were responsible for 110,000 barrels of Kurdistan’s 146,000 barrels of exports in October. The Finance Ministry eventually sent just over $500 million to the KRG later that month, which was distributed to DNO at the beginning of December. Kurdish authorities promised that the second installment was to arrive soon afterward, but then later press reports said that it wasn’t going to be until early 2013. Now there are questions about whether it would happen at all due to Deputy Premier Shahristani’s threat. In total, DNO has only been paid $104 million in June 2011 and $60 million in September 2011, and will receive $116 million this month for all of its exports since 2008. Oil companies in Kurdistan are waiting for a national hydrocarbon law to be passed, so that there are no more conflicts over their operations. That would allow them to legally export, and be able to monetize their investments. Until then, the firms have to rely upon these unreliable short-term export contracts where they only get paid for a fraction of their work.

The third export deal between Iraq’s central and regional governments is still in effect, but it is fraying at the edges. The Kurds are sending oil through the northern pipeline again, and they have received half a million dollars to pay the companies that are operating there. At the same time, it is not meeting its quota, and Baghdad has once again threatened to cut off payments. The two sides are still far apart on oil policy, and that will continue to lead to tension and breakdowns in these agreements. If the current one ends, and there are plenty of signs that it eventually will, it will be followed by another. The Kurds need these deals with Baghdad to show the energy companies that they will eventually be able to get a full return on their investments. The central government welcomes the Kurdish contributions, because it brings in more money and boosts its monthly export numbers. The problems rise from the fact that Baghdad holds the purse, and will continuously hold this over the head of the Kurds until their differences over oil are resolved. Their positions are so far apart however, that this will not come anytime soon, so for the foreseeable future official Kurdish exports will be at the mercy of these volatile agreements.